The Bogleheads' Guide to Investing
by Taylor Larimore, Mel Lindauer, Michael LeBoeuf
Professors like to believe that since we know a lot about one subject, we know a lot about other subjects too. Obviously that's not so. There's nothing more humbling than realizing that you're way, way over your head in a different area of your life, and at those times, it's a relief to find a clearly written guide to help you through those difficult concepts that everyone else seems to understand.
The Bogleheads' Guide to Investing is one case in point. Investments confuse me. But the authors manage to lay out the basics of investing and a particular investment philosophy in clear, understandable terms that even a rhetoric professor can follow. The book is named after the authors' investment mentor, Vanguard founder John C. Bogle, who pioneered the no-load mutual fund and introduced the first index fund. Bogle's philosophy is fairly simple: rather than trying to beat the market and trust in active managers, buy mutual funds that represent the market index. The markets tend to rise over time, and active funds have trouble beating the market in the long run, so investors in indexed funds tend to come out ahead -- and they don't have to pay steep management fees.
The book also has a lot of advice that makes intuitive sense. Spend less than you make. It's not how much you make, it's how much you keep. Stay out of debt. Pay yourself first. Buy used items, including clothing and cars (this from three authors who are millionaires). Commit future pay increases to investing. Diversify, making low-cost indexed mutual funds your primary investment. Establish a stock-bond-cash allocation and stick with it, rebalancing every 18 months even when your stocks are going through the roof. Get a Roth IRA as soon as you can and let the magic of compound interest work. Put windfall funds away for six months before touching them so that the excitement wears off. Write down your major financial goals on one piece of paper.
Reading this book hasn't made me an investing expert. But it has given me some solid advice and some basic tools for managing my small investments, and some confidence in how to proceed. Check it out.